While many are happy to develop strategy, the measurement of its success (or otherwise) is often a little more hit and miss. In 1992 Robert S Kaplan and David Norton first described the Balanced Scorecard which rapidly became a favoured method for the measurement of strategic implementation. But what is ‘the Balanced Scorecard’?
There are many ways of measuring whether the goals defined by your strategy have been achieved, one of which is the ‘Balanced Scorecard’ first articulated by Robert S Kaplan & David Norton in a 1992 Harvard Business Review article.
The Balanced Scorecard (or BSC) takes the strategy of an organisation and separates it into quantifiable goals and then measures whether those goals are being achieved. Thus, as part of the strategy, objectives are broken into tactical (short-term) activities which are then given measures. It is the structure of the metrics to which the term ‘balanced’ is applied.
Kaplan later expanded on the theory in the book; ‘The Balanced Scorecard: You Can’t Drive a Car Solely Relying on a Rearview Mirror’ a title which sums up the thinking behind BSC pretty succinctly.
That thinking was based on agreeing with the established need to use financial data to navigate and to reassure shareholders while recognising that other perspectives are also necessary. They established four in total:
THE FINANCIAL PERSPECTIVE
Financial information is not something companies tend to lack. Accurate data on return on capital employed, unit costs, cash flow, market share and profit growth all have an important bearing on a company’s progress. However, financial data is, by definition, historical telling us what has happened to the company not what is happening right now and much less what is likely to happen in the future. As financial services products always state, ‘past performance is no guarantee of future success.’
THE CUSTOMER PERSPECTIVE
While the concept of ‘customer satisfaction’ was in its infancy and ‘customer relationship management’ was still to be heard of, Kaplan and Norton acknowledged the fact that it costs more to find a new customer than it does to retain an existing one and thus recognised it would be useful to gather data based on the customer’s view. This data would be gathered from measuring (e.g.) customer satisfaction, customer retention rates, response rates and company reputation.
THE BUSINESS PROCESS PERSPECTIVE
There is little use in employing only external measurements if the internal workings of the company are being left to chance. BSC recognises the
need to measure the performance of all those vital processes which drive the business. The measures will vary depending on the nature of the business, possible examples being manufacturing excellence, quality, delivery times and inventory management. If in doubt as to what should be measured, ask yourself; “what must we excel at?”
THE LEARNING AND GROWTH PERSPECTIVE
This perspective gives a measure of potential performance with a focus on the development of people but should not be read too narrowly. Learning encompasses more than training and while hours spent on training might be one measure consider number of employee suggestions, access to mentoring, communication between employees (e.g. problem identifying and solving), research and development, innovation, percentage of sales from new products, etc.
The data gathered from these four different perspectives combines to create the Balanced Scorecard although it is important to remember that
measurement for the sake of measurement is wasted resource. The point of using the BSC is to provide measurement which allows managers to see the company more clearly thereby enabling them to manage more effectively. Thus BSC is both a measurement and a management system. As Kaplan and Martin point out, you can’t improve what you can’t measure.
A word of caution, performance measurement is not an end in itself. As Goodhart’s Law* suggests; measures should not become targets. However they should be an aid to analysis and although they don’t necessarily need to be accurate people must have confidence in them as reliable indicators of what is actually going on.
In a nutshell, as David Norton said in 2001 in ‘The Strategy Focused Organisation’; “once you describe it, you can manage it.”
*Goodhart’s Law: ‘Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes,’
© Jim Cowan, Cowan Global Limited, 2011